Conclusion
At this point, Section 529 plans offer the "cleanest" and simplest path to saving for college. They were designed specifically for this goal, and Congress has now removed the uncertainty regarding their future tax status. Assuming you pick one that features a solid lineup of low-cost index fund investment choices, their only significant drawback is that you're "settling" for an indexing strategy, as opposed to being able to follow a potentially more profitable Upgrading path within a Roth or Coverdell.
For those who do want to chart their own investment course, I still believe in fully funding a Roth IRA every year as a joint retirement/college savings account. However, as college costs continue to escalate, the financial aid implications make it reasonable to question if the average family is going to come out ahead Upgrading in a Roth vs. indexing in a 529 plan. Unfortunately, there's no easy answer to that as future returns are unknown and many schools use their own financial aid formulas anyway.
Coverdells would fill in this gap nicely if their already low $2,000 annual contribution limit wasn't slated to be cut to an insufficient $500 in a few years. Still, Coverdells are a good option for now; just realize you may need to reevaluate in 2010. Of course, you can hedge your bets somewhat by contributing some to a Roth each year while also funding a Coverdell or 529 account. That path may leave you with the most flexibility as your future financial situation becomes more clear.
As we have seen, Roth IRAs, Coverdell ESAs and 529 plans all offer pros and cons. Don't get so caught up trying to figure out the very best option that you postpone making a decision. Any combination of these three choices is better than waiting. Review the options, pray for wisdom and discernment, and get started! Contributing early and often is the best way to win the college savings race.
Published since 1990, Sound Mind Investing is America's best-selling financial newsletter written from a biblical perspective. Visit the Sound Mind Investing website.
Click here to request a free information packet regarding the Sound Mind Investing newsletter.
Click here to investigate the widely-acclaimed "Sound Mind Investing" book, available at a 35 percent discount!
